'Peak oil' a myth

Jan. 11, 2010
In "Oil, gas supply trends point to tight spots, higher prices," Rafael Sandrea observed, "Global crude oil production has…remained flat at 71 million b/d since 2004" and went on to comment that three-digit oil prices may be "lurking on the horizon" (OGJ, Nov. 23, 2009, p. 37).

In "Oil, gas supply trends point to tight spots, higher prices," Rafael Sandrea observed, "Global crude oil production has…remained flat at 71 million b/d since 2004" and went on to comment that three-digit oil prices may be "lurking on the horizon" (OGJ, Nov. 23, 2009, p. 37). Indeed, all too often projections of future oil demand and production are made without fully considering the impact of oil prices.

Over 50 years ago M. King Hubbert made an important contribution to our understanding of oil production trends saying that for any given geographical area, from an individual oil-producing region to the planet as a whole, the rate of petroleum production tends to follow a bell-shaped curve. "Peak oil" occurs when production can no longer be increased to meet demand.

He correctly predicted that production of oil from conventional sources would peak in the continental US in the period 1965-70. In fact, oil production will peak and then decline in any petroleum region, province, or single country as long as producers continue to find and produce large reserves of comparatively low-cost crude in other areas. Hubbert went on to predict a worldwide oil peak in "about half a century" but did suggest that the actions of the Organization of Petroleum Exporting Countries might flatten the global production curve, delaying the peak for perhaps 10 years.

During his era of cheap oil it is understandable that Hubbert failed to appreciate the impact that rising oil prices would have on consumption and, consequentially, on oil production. Worldwide "peak oil" is a myth stemming from the failure to recognize that a worldwide shortage of any commodity in demand results in higher prices, thereby stifling demand.

Projections of future world oil production cannot simply be linked to demand but must factor in the price of oil which triggers a complex set of interrelationships. Higher oil prices provide a strong incentive to use less energy, and demand weakens. Oil exploration accelerates, and oil reserves increase accordingly. Alternative energy sources become more attractive.

All of these responses to higher oil prices push "peak oil" further into the future. Thus, "peak oil" is like the desert mirage that recedes as one approaches it. Although rising oil prices have the feedback effect of suppressing demand and increasing petroleum reserves, this cannot go on indefinitely. But the assumption that world oil production will peak and then decline is illusory and only prevails in the absence of rising oil prices.

Today, in the context of world petroleum production and factoring in rising oil prices, "peak oil" becomes "plateau oil." There will be no abrupt peaking of world oil production followed by a decline as postulated by Hubbert. Instead, there will be an extended period when oil continues to be available at "prevailing prices." Over time, prevailing prices will fluctuate along a rising trend line, thereby prolonging "plateau oil."

The key, of course, is the impact that rising oil prices will inevitably have in discouraging oil consumption and in the development of alternative energy sources. This scenario will continue to play out over an extended period until oil production, even at elevated prices, can no longer meet demand and production gradually declines from its plateau.

Oil reserves are finite. The production of most OPEC producers has topped out; they do not have the capability of significantly increasing production. Ongoing exploration and recent discoveries of immense presalt hydrocarbon reserves in deepwater offshore areas assure continuing crude oil supplies. This will not be cheap oil but will require heavy capital investments to develop, bring on line, and maintain on production. The resulting higher crude oil prices will also improve the economics of extracting oil from tar sands and perhaps oil shale, thus adding new but costly reserves.

Clearly, the petroleum industry is not perched on the edge of oblivion. There will be no abrupt decline in production in accordance with Hubbert's "bell-shaped curve" prediction. Instead, the world faces a period of "plateau oil," a time when the demand for oil moderates in response to higher oil prices and production levels off accordingly.

This can be seen in world crude oil production levels which have remained relatively stable in the range of 72-74 million b/d since 2004 following years of growth. We have entered a new period where the rising oil prices increasingly dampen demand and where world production no longer rises annually to accommodate demand but begins to stabilize.

The challenge is to see how long this leveling-off period can be maintained. The industry's future is in the hands and minds of those geologists and engineers who can see opportunities and capitalize on them. Those who can find and produce oil in increasingly hostile environments will prosper. The earth's finite oil reserves are being gradually depleted but are by no means near exhaustion.

Thomas Wyman
Palo Alto, Calif.

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